December 31, 2009

An expert on politics and foreign policy, CFR Director of Studies James M. Lindsay summarizes President Barack Obama’s first year in office as “great expectations running smack into daunting realities.” He says Obama came into office with expectations so high that people in the United States and abroad were led “to hope that Barack Obama would have the key to solving what, in reality, is a long list of very difficult, perhaps intractable problems.” Lindsay says Obama was surprised that his initial infusion of troops to Afghanistan did not produce important results, and he has since scaled back his goals. Iran’s apparent march toward nuclear weapons capability poses an increasingly difficult set of policy choices for the president. Meanwhile, Lindsay says, “Getting U.S.-Chinese relations right is going to be one of the biggest challenges President Obama faces.”

President Obama is nearing completion of his first year in office. How would you summarize his accomplishments in the foreign policy field?

I would summarize President Obama’s first year in office as follows: Great expectations running smack into daunting realities; realities are winning.

Were the expectations caused by the public’s disillusion with President George W. Bush and the feeling that Obama would accomplish more?

The great expectations are really a testament to President Obama’s skills as a politician and to his own biography and to the failures of the Bush administration. Those three things came together and led many Americans and many people outside of the United States to hope that Barack Obama would have the key to solving what, in reality, is a long list of very difficult, perhaps intractable problems.

And do you think that’s what led the Nobel Committee to award him a prize when even he had to admit he had not achieved any significant results in foreign affairs?

[W]hat we’ve seen over the second half of 2009 is the president scaling back the nature of [U.S.] goals in Afghanistan to something more achievable. [The United States has] gone from defeating the Taliban to degrading their capabilities.

Certainly the decision by the Nobel Peace Prize Committee was an award based on potential and in some ways a backhanded slap at President George W. Bush, whose policies the members of the Nobel Peace Prize Committee really disliked. The sad thing for President Obama is that winning the award actually made his job of accomplishing his goals in foreign policy harder because it led to the inevitable questions, not just by Americans but by people outside the United States, as to what he has actually done to deserve the award. The president, to his credit, did not dodge the issue in his Nobel speech. He confronted it head on and talked about the award as recognition of what people hope that he can accomplish and his commitment to living up to the goals of the Nobel Peace Prize.

I was struck by how, in his first weeks in office, President Obama was appointing special envoys to many of the tough areas. He picked former Senator George J. Mitchell to work on Israeli-Palestinian issues. After a year of shuttling back and forth to the Middle East, Mitchell must feel enormously frustrated.

That decision to appoint envoys and to tackle some of the toughest issues in American foreign policy early on stemmed directly from how the president campaigned during the election. What candidate Obama argued was that [the United States] had to put diplomacy at the forefront of American foreign policy, and so when he became president, one of the first things he did was to take some tangible steps to show that he intended to use diplomacy to advance American foreign policy interests. It was never lost on the president, however, that diplomacy never was, and never will be, a magic solution for the troubles [the United States] faces. What many people missed in many of Barack Obama’s campaign speeches is that when he talked about diplomacy, he did not offer it up as a magic bullet, and he often acknowledged how difficult the challenges are facing the United States. And what Senator Mitchell has discovered first hand is, in fact, the difficulty of moving forward.

In his campaign speeches, Obama always said that Afghanistan was more important than Iraq. As president, he called it in August a “war of necessity,” and then after a long period of study, he decided to increase the troop level there by thirty thousand. At the same time, he announced July 2011 as the date for beginning the withdrawal. How important is Afghanistan to his administration?

Let me just make a brief remark about Iraq first then talk about Afghanistan. The fact that Iraq is not on the front page of the newspapers is actually good news. There are a lot of problems in Iraq. Iraq is still not out of the woods, but the news coming out of Iraq is reasonably good and provides some reason for optimism that [the United States] will, in fact, be able to withdraw U.S. combat troops over the president’s proposed nineteen-month time horizon. On Afghanistan, you are right. Candidate Obama often pointed toward Afghanistan as the war [the United States] should have been fighting, rather than fighting the war in Iraq. He made producing forward momentum in Afghanistan a priority early on.

[S]o far the United States has not found that talking tough or talking sweetly moves the government of Iran, which is why over the next twelve months Iran is likely to be a major headache for President Obama.

He announced early this year he was sending twenty-one thousand more U.S. troops to Afghanistan. Having done that, the president’s expectation in the spring of 2009 was that he had turned the corner in Afghanistan, which is why when General [Stanley] McChrystal [commander of U.S. forces in Afghanistan] did his review in the summer of 2009 and came back and said, “We’re in deep trouble in Afghanistan,” the president and much of the White House staff were caught by surprise. And what we’ve seen over the second half of 2009 is the president scaling back the nature of [U.S.] goals in Afghanistan to something more achievable. [The United States has] gone from defeating the Taliban to degrading their capabilities. And the result of the very deliberate decision-making process in the fall of 2009 was to come up with a series of achievable goals and a workable strategy for reaching them.

And the United States is kind of stuck with the fact that there is a president in Afghanistan who most officials in this country think isn’t very capable and is open to corruption. This of course diminishes the support for Afghanistan in Washington, I suppose.

That’s the dilemma that you face in every kind of insurgency situation. If the government were popular, effective, and efficient, you, in all likelihood, wouldn’t have an insurgency. So the challenge for the United States is not simply a military challenge of degrading Taliban capabilities, but of working to improve the ability and efficiency of Afghanistan’s political institutions, and that is an extraordinarily tall order. That’s why I wouldn’t be surprised if over the next eighteen months, the military is able to turn the tide in the battle against the Taliban, but unless there is some dramatic improvement in Kabul, [the United States] will be in a position in which it’s not clear that the Afghan government can survive on its own.

Obama came into the office on a pledge of trying to seek a dialogue with the Iranians. He went to extraordinary lengths, sending private messages to Ayatollah Ali Khamenei and speaking publicly to the Iranian people on their new year. But so far, he doesn’t seem to have to gotten much in return. The United States is routinely scorned by the Iranian leadership.

President Obama sought to engage Iran’s government, as you suggest. The answer hasn’t been the one he’d hoped for. This has created a problem for Barack Obama back in the United States. It raises serious questions about his entire strategy of engagement, and certainly his domestic political opponents have seized on it to argue that he hasn’t been tough enough in dealing with the Iranians. But the broader issue here is that, so far, the United States has not found that talking tough or talking sweetly moves the government of Iran, which is why over the next twelve months Iran is likely to be a major headache for President Obama.

With each passing month, Iran gets closer to a potential nuclear capability. No one regards that as a good thing for the Middle East, and the question that is going to face the president and his advisers is what you do about it. Do you launch a military strike with all of the attendant risks and dangers to American forces in the region? Do you give a green light to the Israelis to make an attack with all of the risks in that strategy? Do you step back from your rhetoric and say, “OK, now we’re going to try and contain Iran,” with all the risk attendant to allowing Iran to go nuclear when you said you would not let that happen? It’s going to be a very difficult series of policy choices for President Obama to work through.

Do you think it is still possible the Iranians might try to strike a deal before Obama’s year-end deadline hits?

The reality is that the government in Tehran had been willing to make concessions, and then it yanked those concessions back. I would expect that if the Obama administration is successful in getting the Russians and Chinese to impose more significant sanctions on Tehran–that’s a big “if”–we will see Tehran at least make some gestures to indicate a willingness to work out a deal. That’s not the same thing as striking a deal. What complicates all of this is that from the best we can tell, there is significant jockeying for power within Iran. Different factions are trying to establish their control, and all of the members of the ruling coalition feel greatly threatened by the rise of the opposition in the wake of the disputed June elections. That mix makes it very difficult for engagement strategy to work, in part because back in Tehran, people you’re hoping might be willing to stick their necks out to do a deal are worried about what’s going to happen if they do. And so the political dynamics in Tehran right now don’t seem to favor major diplomatic breakthroughs.

I was looking at an essay by Aaron David Miller, who said that Obama’s kind of like a Gulliver who’s pinned down by all these little countries that make it almost impossible to achieve anything. Do you like that analogy?

[The United States] wants China to change its behavior on currency; we also want China to do a bunch of other things for us, and we’re going to be sending mixed messages.

It’s not an analogy I would use. It’s not the president who’s tied down. It’s the reality of the situation that the United States faces. The United States has tremendous unrivaled military power, but as we saw in Iraq, having unrivaled military power doesn’t solve all of your problems. And again, if you look at the Bush administration, which no one doubted was willing to exercise America’s military might, it was not able to solve these problems. In part, this is because in dealing with regimes like North Korea or Iran you have to have, or be able to create, a set of pressures–either externally or internally–that leads them to want to compromise. So far, in Tehran, they don’t see it in their interest to compromise or strike a deal, and successive American presidents, Democratic and Republican, have been seeking to pull the levers of power to make that happen. The problem doesn’t adhere to a particular president, it’s in the nature of the situation.

We haven’t talked about Obama’s relations with China. When he was in China in November, the Chinese in effect “muzzled” him by not allowing him to speak to the Chinese people, and by not allowing questions at his brief news conference at the end of the trip. And even though China and United States are major trade partners, there were considerable disagreements in Copenhagen at the recent climate control conference.

Getting U.S.-Chinese relations right is going to be one of the biggest challenges President Obama faces. The president and his advisers clearly understand that on most of the issues the United States cares about–Iran, climate change, trade, international finance–China is going to be a major player. The question is, “How do you get the Chinese to cooperate?” Obviously, on the economic front, there are a number of very troubling signs of the Chinese playing the role of the spoiler, of free riding on the system to extract benefits for themselves. As long as the U.S. economy has a high unemployment rate, there is going to be growing pressure on the Obama White House to do something about China’s trade policies and, even more importantly, China’s currency policies. China currently fixes its currency to the dollar, rather than letting it float. This has had the effect of making Chinese goods cheaper than they should be, which helps Chinese exports, but is doing great damage to many of the economies in Southeast Asia.

The real pressure, going forward in the Obama administration, is to push the Chinese to change their policies. That’s going to be difficult to do because there’s actually a battle within Beijing about what China’s economic policy should be, how much it should rely on export-led growth versus domestic demand. [The United States] wants China to change its behavior on currency; we also want China to do a bunch of other things for us, and we’re going to be sending mixed messages.

This week the stock market reached a 15-month high with the FTSE 100 rising above 5,441 points – the last time it scaled such heights was the last trading day before Lehman Brothers filed for bankruptcy in September 2008.

The rally, which has seen the FTSE rise almost 22% this year, has prompted some fears of a stock market bubble. Guardian.co.uk/money asked six investment fund managers and advisers if investors should feel confident about their equity holdings or should be shifting their investments.

“I think we are far away from being in a bubble with the UK stock market reasonably priced. It is slap bang in the middle of its historic price-to-earnings range so looks pretty good value to me. When I look at the stock market and compare it to the rates on bank deposit accounts, the alternatives do not look very attractive. The biggest risk is a double dip in the economy, but my view is that it is stabilising. With my personal investments I am happy with equities and if anything am looking to add to them.”

“You have to be a bit careful in late December and the new year because you tend to get a false market. We have seen the Christmas rally that you often get, so will not get a true idea of the market until the second week of January.

“Most of the markets have had a strong run in 2009. A lot of that has been from the government stimulus that is being slowly withdrawn. So I would not jump on board anything, but if you look at pharmaceuticals, telecoms and defence they are undervalued and look quite good.

“They have not bounced back nearly as much as other stocks and have really good yields that look safe. Next year could be hard and the stocks that perform well could be different from this year. You want stocks that are visibly earning and not economically sensitive, companies with organic growth and some kind of niche that will trade through difficult conditions.”

“If you read stockbroker reports many people are worried that 2010 will be a harder year to generate consistent returns… A lot of people have written off the UK market as it is not China or Brazil, but it is international in composition. The recovery in the global economy is going to throw up some pockets of growth. It is important to take a long-term view and we are focusing on those with quality growth rather than the cheapest stocks in the market. Those in more cyclical areas, that have been the driving force of the rally, will find 2010 a more difficult year.”

“Looking at the ratings in terms of equity yields they are low when compared to the yields from regular interest rates. If you had £1m in the bank it would be doing nothing. There is no reason why we will not see a rise in the FTSE to 6000 at some point next year. If you look at the figures from December 1997 then you see we are at roughly the same point as 12 years ago. People forget how little it has moved in the last 12 years.

“The market sometimes moves upward at the end of the year with people putting cash in, but the economic trends are broadly positive. The economy is entering a recovery phase with house prices up and revised economic growth figures. The rating of the market is roughly in line with long-term averages. If you look at the hard data, things are clearly looking upwards.”

“We are still well below where we were 10 years ago in the stock market. You really know when you are in a bubble when people are sitting around coffee talking about equities and how good they are, just like people were with property two or three years ago. It is not like that at the moment so that is a good indicator that we are not in a bubble. Equities are never safe in the short term because sentiment can drive the economy down, but in the long term equities offer relative value.”

“There has been a similar equity market in 2009 to that of 2003 and 2004, but we are now at an inflection point and we are likely to see the market act differently. It is important to look differently at the prospects of the UK economy and the UK stock market. The prospects for the economy remain difficult, but that does not necessarily mean that all UK listed companies will be affected.”So far there has been little differentiation as stocks have risen on the tide up from the lows in the market, but now really consistent higher quality companies are beginning to outperform. These are companies with strong market positions and an ability to fund growth here and abroad moving forward.

“Pharmaceuticals such as Glaxo and Astra Zeneca, oil companies such as BP and Shell, as well as Imperial Tobacco, Prudential and Diageo are all large UK-listed companies with earnings from overseas that we will see outperforming heavily indebted housebuilders and engineering companies. They will benefit from the strength of the dollar and starting from strong positions with their balance sheets.”

NE of the biggest challenges facing the Fed is widespread ignorance about how it actually operates. Inflation is falling, unemployment is 10%, yet some people think it’s running an inflationary policy because an extra $1 trillion of reserves are in the banking system.

The misperception has only grown with yesterday’s announcement that the Fed would offer “term deposits” to banks as a way of draining some of the excess reserves its emergency operations have created. The move has been widely reported as aimed at keeping banks from lending the reserves out, which would spur inflation. This has brought differing reactions depending on whether you think the Fed should be worried more about inflation or unemployment. Ezra Klein and my colleague across the hall think the latter, and are thus critical of the move.

I sympathise with their point of view but some clarity about what the Fed is doing is in order. For starters, the volume of reserves has almost no significance for the growth of bank lending and inflation.

For the Federal Reserve, as with most central banks, reserves ordinarily serve only one purpose: to help it establish a target interest rate. In ordinary times, some banks have more reserves than they need and lend them to those that have too little. The rate on those interbank loans is called the fed funds rate. If the Fed wants a higher fed funds rate, it drains reserves. If it wants a lower one, it adds reserves. The quantity of reserves, per se, is irrelevant to the Fed. It’s the interest rate that affects spending and it’s spending that drives both the demand for credit and, ultimately, inflation.

These are, of course, extraordinary times. The Fed’s orthodox means of boosting the economy is exhausted because the federal funds rate is at zero. It has increasingly turned to unorthodox means. It has bought Treasuries in an effort to lower long-term interest rates. For a while, it behaved more like a commercial bank than a central bank by making loans to banks, financial institutions, companies, and homeowners (by purchasing mortgages). These actions would only be inflationary if they stimulated demand and elevated the growth of credit; yet overall credit is contracting; the Fed’s actions have only served to stop it from contracting even more quickly.

When a commercial bank makes a loan, it will usually finance it with deposits from customers. The Fed, on the other hand, gets to create its own deposits by simply creating reserves. (This is the equivalent of printing money.) The point is that the Fed is not trying to increase lending by increasing reserves; it is trying to increase lending by lowering long-term rates and directly supplying credit to borrowers who can’t get it elsewhere. Higher reserves are the unintended byproduct. Well, unintended or not, couldn’t all those excess reserves spur credit growth and inflation? No. Reserves have not been a relevant constraint on bank lending for decades, if ever. Bank lending is constrained by customer demand and by capital. Right now, loan demand is moribund (in spite of a zero federal funds rate) and capital is in short supply. This is partly self-induced; banks have elevated underwriting standards to levels that fewer customers can meet and regulators are hounding them to boost capital ratios, which they can do by lending less. If inflation becomes a problem it will be because the Fed kept interest rates too low for too long in the face of resurgent demand. Personally, I worry more about the opposite—that it prematurely raises rates and demand sputters. Yet in neither case will it have anything to do with whether excess reserves today are $1 trillion or $1.

If reserves don’t matter, why does the Fed want to be able to drain them? It goes back to the original purpose of reserves: to manage the fed funds rate. The Fed could announce a federal funds target of 3% but the tsunami of excess reserves now out there swamps any conceivable demand, so the Fed funds rate would be guaranteed to remain stuck at zero. The target would be meaningless.

The solution is twofold. First, the Fed can pay interest on those reserves, and if that interest rate is high enough, it will put a floor under the federal funds rate. But that may not be perfect. So, the second solution is to drain or otherwise immobilise those excess reserves so that banks won’t want to, or can’t, lend them in the fed funds market. That’s the purpose of the term deposits, of the long-term reverse repos, and of other Rube Goldberg solutions yet to be dreamed up by Brian Madigan, Brian Sack, and their fellow propeller heads at the Fed. It makes perfect sense for the Fed to figure out today how it will go about raising the fed funds rate eventually, but it doesn’t mean (or at least I hope it doesn’t) that it’s about to do it.

We used to judge whether monetary policy was tight or loose by looking at the federal funds rate target. It’s gotten harder. You now also have to look at the Fed’s asset purchases, and its credit programmes. Eventually you’ll have to look at the interest rate on excess reserves or IOER (God, I wish they’d come up with a better name for that) and the results of term deposit and reverse repo auctions. And as always, you have to listen to what it says. But one thing has not changed; you don’t have to pay any attention to reserves.

NE of the biggest challenges facing the Fed is widespread ignorance about how it actually operates. Inflation is falling, unemployment is 10%, yet some people think it’s running an inflationary policy because an extra $1 trillion of reserves are in the banking system.

The misperception has only grown with yesterday’s announcement that the Fed would offer “term deposits” to banks as a way of draining some of the excess reserves its emergency operations have created. The move has been widely reported as aimed at keeping banks from lending the reserves out, which would spur inflation. This has brought differing reactions depending on whether you think the Fed should be worried more about inflation or unemployment. Ezra Klein and my colleague across the hall think the latter, and are thus critical of the move.

I sympathise with their point of view but some clarity about what the Fed is doing is in order. For starters, the volume of reserves has almost no significance for the growth of bank lending and inflation.

For the Federal Reserve, as with most central banks, reserves ordinarily serve only one purpose: to help it establish a target interest rate. In ordinary times, some banks have more reserves than they need and lend them to those that have too little. The rate on those interbank loans is called the fed funds rate. If the Fed wants a higher fed funds rate, it drains reserves. If it wants a lower one, it adds reserves. The quantity of reserves, per se, is irrelevant to the Fed. It’s the interest rate that affects spending and it’s spending that drives both the demand for credit and, ultimately, inflation.

These are, of course, extraordinary times. The Fed’s orthodox means of boosting the economy is exhausted because the federal funds rate is at zero. It has increasingly turned to unorthodox means. It has bought Treasuries in an effort to lower long-term interest rates. For a while, it behaved more like a commercial bank than a central bank by making loans to banks, financial institutions, companies, and homeowners (by purchasing mortgages). These actions would only be inflationary if they stimulated demand and elevated the growth of credit; yet overall credit is contracting; the Fed’s actions have only served to stop it from contracting even more quickly.

When a commercial bank makes a loan, it will usually finance it with deposits from customers. The Fed, on the other hand, gets to create its own deposits by simply creating reserves. (This is the equivalent of printing money.) The point is that the Fed is not trying to increase lending by increasing reserves; it is trying to increase lending by lowering long-term rates and directly supplying credit to borrowers who can’t get it elsewhere. Higher reserves are the unintended byproduct. Well, unintended or not, couldn’t all those excess reserves spur credit growth and inflation? No. Reserves have not been a relevant constraint on bank lending for decades, if ever. Bank lending is constrained by customer demand and by capital. Right now, loan demand is moribund (in spite of a zero federal funds rate) and capital is in short supply. This is partly self-induced; banks have elevated underwriting standards to levels that fewer customers can meet and regulators are hounding them to boost capital ratios, which they can do by lending less. If inflation becomes a problem it will be because the Fed kept interest rates too low for too long in the face of resurgent demand. Personally, I worry more about the opposite—that it prematurely raises rates and demand sputters. Yet in neither case will it have anything to do with whether excess reserves today are $1 trillion or $1.

If reserves don’t matter, why does the Fed want to be able to drain them? It goes back to the original purpose of reserves: to manage the fed funds rate. The Fed could announce a federal funds target of 3% but the tsunami of excess reserves now out there swamps any conceivable demand, so the Fed funds rate would be guaranteed to remain stuck at zero. The target would be meaningless.

The solution is twofold. First, the Fed can pay interest on those reserves, and if that interest rate is high enough, it will put a floor under the federal funds rate. But that may not be perfect. So, the second solution is to drain or otherwise immobilise those excess reserves so that banks won’t want to, or can’t, lend them in the fed funds market. That’s the purpose of the term deposits, of the long-term reverse repos, and of other Rube Goldberg solutions yet to be dreamed up by Brian Madigan, Brian Sack, and their fellow propeller heads at the Fed. It makes perfect sense for the Fed to figure out today how it will go about raising the fed funds rate eventually, but it doesn’t mean (or at least I hope it doesn’t) that it’s about to do it.

We used to judge whether monetary policy was tight or loose by looking at the federal funds rate target. It’s gotten harder. You now also have to look at the Fed’s asset purchases, and its credit programmes. Eventually you’ll have to look at the interest rate on excess reserves or IOER (God, I wish they’d come up with a better name for that) and the results of term deposit and reverse repo auctions. And as always, you have to listen to what it says. But one thing has not changed; you don’t have to pay any attention to reserves.

It’s one thing for a couple of programmers to hack together a side project.

It’s another thing for Google to put gobs of time and money behind it.

The best way to predict how committed Google will be to a given project is to figure out whether it is “strategic” or not.

Google makes 99% of their revenue selling text ads for things like airplane tickets, dvd players, and malpractice lawyers. A project is strategic for Google if it affects what sits between the person clicking on an ad and the company paying for the ad.

Here is my rough breakdown of the “layers in the stack” between humans and the money:

OS: Not commoditized, and dominated by archenemy (Microsoft)!! Hence Android/Google Chrome OS is very strategic. Google also needs to remove main reasons people choose Windows. Main reasons (rational ones – ignoring sociological reasons, organizational momentum etc) are Office (hence Google Apps), Outlook (hence Gmail etc), gaming (look for Google to support cross-OS gaming frameworks), and the long tail of Windows-only apps (these are moving to the web anyways but Google is trying to accelerate the trend with programming tools).

Browser: Not commoditized, and dominated by arch enemy! Hence Chrome is strategic, as is alliance with Mozilla, as are strong cross-browser standards that maintain low switching costs.

Websites/search (”ad inventory”): Search is obviously dominated by Google. Google’s syndicated ads (AdSense) are dominant because Google has the highest payouts since they have the most advertisers bidding. This in turn is due largely to their hugely valuable anchor property, Google.com. Acquired Youtube to be their anchor property for video/display ads, and DoubleClick to increase their publisher display footprint. On the emerging but fast growing mobile side, presumably they bought AdMob for their publisher relationships (versus advertiser relationships where Google is already dominant). The key risks on this layer are 1) people skip the ads altogether and go straight to, say, Amazon to buy things, 2) someone like Facebook or MS uses anchor property to aggressive compete in syndicated display market.

Relationships to advertisers: Google is dominant in non-local direct-response ads, both SMB self serve and big company serviced accounts. They are much weaker in display. Local advertisers (which historically is half of the total ad market) is still a very underdeveloped channel – hence (I presume) the interest in acquiring Yelp.

This doesn’t mean Google will always act strategically. Obviously the company is run by humans who are fallible, emotional, subject to whims, etc. But smart business should be practiced like smart chess: you should make moves that assume your opponents will respond by optimizing their interests.

The UK Takeover Panel agreed to extend the deadline for Cadbury to release new information as a defence against the offer from January 12 to January 15, so that “detailed estimated trading results” for 2009 can be put together.

Kraft has agreed to the extra time, and the rest of the takeover timetable is unchanged, the Panel said

Cadbury said it was “pleased that our shareholders will be given the opportunity to review the most up-to-date information available on our trading performance as they evaluate the Kraft offer”.

Kraft has until January 19 to make a revised offer, and February 2 is the final date by which the US food company must say whether it has enough acceptances to push the takeover through or end the bid process.

Kraft’s cash-and-shares offer is worth 748p a share at current prices, which compares to Cadbury’s share price of 795p yesterday. Many analysts expect a successful bidder for Cadbury will have to offer more than 800p a share.

Cadbury’s board has dismissed the Kraft offer, calling it “derisory,” and advised shareholders to do the same. In a defence document published earlier this month, Cadbury raised its sales and profit margin forecasts for the next three years.

Italian chocolate maker Ferrero has recently confirmed that it is still looking at its options with regards to a bid for Cadbury. Hershey, the US confectionery company, is also interested. Cadbury sees Hershey as a better fit than Kraft because it only makes sweets and was also founded on philanthropic principles.

I was just about to write a year-end reflection in which I was going to say that the Obama economic policy team had exceeded expectations–a sizeable fiscal stimulus, a second round now moving through the congress, victory in the intellectual war over whether the government should and can stabilize the economy, blocking any protectionist moves, key support for what looks to be a successful (if moderate Republican) health care reform, key support for ongoing climate policy–a solid B+/A-. The major problems are (a) that the macroeconomic situation turned out to be much more dire than we thought last November-December, (b) that financial regulatory reform looks to be a flop–too many members of congress bought by bankers–but IMHO Geithner and company played out a weak hand that Paulson had taken care to leave them, and (c) that the fact that private banks have profited while the government has not from the bailouts means that there is now no more ammunition should things turn south once more.

But still: exceeds expectations. Remember: Clinton’s attempt at a stimulus package cratered in the spring of 1993, NAFTA nearly failed in spite of Republican and Democratic leadership support, the 1993 Reconciliation Bill was the narrowest of victories (albeit a very important one)–and that was it for two years.

Al Hunt [who] has a rather distressing portrayal of the functioning (or not) of Obama and his econ team…

Hunt:

Obama’s Foreign-Policy Team Bests Economy Stars: Two recent anecdotes illustrate this problem. On Dec. 2… Obama… heard a familiar reprise of the previous several meetings with budget director Peter Orszag arguing for more emphasis on reducing the deficit and Council of Economic Advisers chief Christina Romer leading the contingent espousing a greater short-term stress on jobs. The president, by his standards, exploded. “Why are we having this meeting again, the same discussion,” participants quoted him as saying. Several administration insiders, prominent outside Democratic economic advisers and a few Congressional heavyweights, all worry this is symptomatic of a process that isn’t working well. Summers, they argue, is brilliant on policy and ill-suited for a high-level staff job, which is what the head of the National Economic Council is. “If you came up with 10 words to describe Larry, coordination and collaboration would not be two,[1]” says one person requesting anonymity who has worked with Summers extensively and admires his intellectual force…. Summers too often is dismissive of fellow economic advisers, other than Geithner… he gets a bum rap for supposedly freezing Volcker out….

The other problem, an inability to effectively communicate an economic policy, was typified in a Dec. 4 interview with Geithner, who was asked what is the “clear, coherent economic message.”… He proceeded to talk about “high-class education” for children, affordable health care, better incentives for energy and infrastructure, public-private arrangements and the like.[2] There are 15.4 million unemployed Americans and another 11.5 million “underemployed,” either having given up looking and thus not counted in the jobless numbers or involuntarily relegated to part-time work. A laundry list of the Democrats’ agenda is unlikely to prove comforting. Geithner, who wins praise from Obama and others for his substantive performance… acknowledges that public communications isn’t his forte. It isn’t Summers’ either. And those who are more effective, including Roemer and fellow Council of Economic Advisers member Austan Goolsbee, sometimes are cut out of the action…

So Hunt has three criticisms:

Effective communicators like Christie and Austan aren’t put out in front enough on the substance and the message.

Larry squashes dissent, dismisses the views of others, and doesn’t let them get their say.

Tim cannot stay on a simple message.

Yet Hunt’s article shows only one of these three. His article doesn’t show Larry squashing dissent and freezing out others. Instead, it shows him running a process in which Christy Romer and Peter Orszag both make their strong–if opposed–pitches. His article doesn’t show Romer and Goolsbee being cut out: Peter Orszag is not in their alone giving the budget briefing. His article does show Tim Geithner getting off message: the message is supposed to be that the administration’s policies are all aimed at creating lots of good jobs to make Americans prosperous–and education, affordable health care, investments in efficient energy, infrastructure, public-private partnerships, etc. are all part of that.

Can we at least ask for articles that show, not tell, the defects in policy-making they claim?

The constraints on the Obama Administration have been mighty: the united, disciplined, destructive opposition of the Republican Party, the extreme and counterproductive perversity of Senators 51 through 60, and the peculiar culture and attitude of the Federal Reserve (though why hasn’t Obama at least made recess appointments for the two vacant Fed governorships?). We are lucky that they have been able to do as much as they have.

So my grade for the Obama economic team for its first year would definitely be: exceeds expectations.

[1] While it is true that “if you came up with 10 words to describe Larry, coordination and collaboration (and consensus) would not be” among them, the ten words that do describe Larry Summers are very strong ones: workaholic, quick, thoughtful, knowledgeable, incisive, encyclopedic, disciplined, dedicated, brilliant, arrogant.

[2] In Business Week, Al Hunt presents this part of the interview… rather differently:

Hunt: Does the Obama Administration have a clear, coherent economic message?

Geithner: Our responsibility is to make sure that we repair what is broken in this economy… and do all those things critical to creating the kind of environment in which private business can flourish. This crisis [is] not like anything we’ve seen before because of the intensity of the financial fire. But the problems America faces today are not just because of the recession. They are the result of a sustained period where we saw public policy just not doing what needed to be done…

SAN FRANCISCO (MarketWatch) — Apple Inc. has seen its market value more than double this year — making it one of the best performers in the tech sector — in part owing to the hype surrounding a product that the consumer-electronics icon has yet even to announce.

Hopes are running high that Apple /quotes/comstock/15*!aapl/quotes/nls/aapl (AAPL212.00, +0.36, +0.17%) will soon lift the wraps on a tablet-style mobile computing device. While the always-secretive company has never confirmed that it is working on such a device, the past few months have been replete with leaks about the product’s design, capabilities, pricing and even name.

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// That has fueled a fresh run on the long-popular stock. In a normally quiet trading period in late December, Apple shares have jumped 10%. That after the stock had already doubled in value from the start of the year, putting the company on track to deliver one of the best performances among tech companies listed on the S&P 500 roster.

“There’s no question that the recent stock activity has been based on more substantial talk about the tablet,” said Gene Munster of Piper Jaffray in an interview. “It’s getting baked in, but it’s not fully baked in yet.”

Munster and other analysts have said they expect the speculative mania to continue until Apple announces the product. The company has reportedly reserved meeting space in San Francisco for late January, and several analysts have reported discussions with component suppliers who indicate that a launch of the device into the market will likely take place in the first half of 2010.

But many points are still unclear, not the least of which is its price. There is a question of whether the tablet, as a mobile computing device, will earn a subsidy from wireless carriers that would hope to use the device to sign customers up for long-term contracts.

Also unclear is whether such a product would be pitched as an expanded e-reader device to compete with such offerings as the Kindle from Amazon.com /quotes/comstock/15*!amzn/quotes/nls/amzn (AMZN136.68, +0.19, +0.14%) or marketed as a multimedia device allowing users to watch movies, listen to music, and read along with communications applications such as voice and email.

The tablet product is ‘getting baked in, but it’s not fully baked in yet.’

Gene Munster, Piper Jaffray

“The question will be whether this device is revolutionary or evolutionary,” said Munster. “The iPhone was revolutionary, and the stock reflected that.”

Repeat of the iPhone?

Apple has, of course, been in a similar position before.

Before the company lifted the curtain on its iPhone in January 2007, the stock had run up by about 70% in the six months leading up to the announcement, a time that also included heavy speculation in the media about a wireless device under development at the company.

More notable is the fact that, after the device was announced, the stock surged another 43% before the product went on sale that summer. Apple closed that year with the stock near the $200 mark — more than double its price at the start of the year.

Wall Street is not overly concerned with the stock’s current valuation, to which it rebounded persuasively after 2008 losses. At a closing price of $209.10 on Tuesday, Apple shares are still well below most price targets set by analysts. The median target on the Street is $245, with the highest goal set at $280, according to data from Thomson Reuters.

Tablet predictions

The absence of any announcement from Apple hasn’t kept analysts from laying out projections for tablet sales in 2010.

Munster of Piper Jaffray has predicted the company will sell about 2 million units in the tablet’s first year on the market. Reid of Thomas Weisel forecast 2.5 million units sold in Year 1. Brian Marshall of Broadpoint AmTech has pegged the 2010 figure at 2.2 million, also modeling in a $599 retail price.

l said in an interview Tuesday. “. That’s conservative.”

The Broadpoint AmTech analyst said the success of the Kindle for Amazon gives a good indication of the potential for a higher-functioning media device. “Clearly, people underestimated the size of the e-reader market,” he said. “The market expects the tablet to be like an e-reader on steroids, a media device with limited Mac functionality. And there is a high likelihood that it will be subsidized by wireless carriers.”

Given the run-up that Apple’s shares saw following the market launch of the iPhone, Marshall said the stock still has plenty of headroom at its current level. “A price of $300 is definitely a possibility further down the road,” he said, though his current price target on the shares is $260.

“The question is, will this device change some of the historical boundaries around publishing on the Web that might create a new business model for publishers,” he said. “You could argue that the iPod saved the music industry. Could the tablet do the same thing for the publishing industry?”

He said the stock would likely be volatile for a time after a product announcement — till market-adoption patterns and levels become clear. “There’s going to be a sobering reality to hit after the news sometime,” Munster said. “That’s why it’s not in our price target right now.”

Dan Gallagher is MarketWatch’s technology editor, based in San Francisco.

Related

At the Saks flagship store in Manhattan, a 23-year-old sales clerk was caught recently ringing up $130,000 in false merchandise returns and siphoning the money onto a gift card.

“Gift card fraud is spiking,” said Joshua Bamfield, author of the Global Retail Theft Barometer, an annual international survey of retailers. “To employees, this is like currency. It’s almost as good as the U.S. dollar.”

After all, walking out with a little card in the wallet is a whole lot easier than lugging a big-screen TV out the back of a store.

Employee fraud involving gift cards appears to be growing sharply as retailers struggle to contain overall theft, now estimated at $36 billion a year in the industry, or 1.51 percent of retail sales, according to a leading national study. Even as total sales have been falling, employee theft and shoplifting have been rising across the United States, industry experts say, with occasional arrests making headlines.

Many of the gift card crimes are straightforward, frequently involving young sales clerks and smaller amounts than the Saks theft. Among the variations of such crimes, cashiers often do fake refunds of merchandise and then, with the amount refunded, use their registers to electronically fill gift cards, which they take. Or sometimes when shoppers buy gift cards, cashiers give them blank cards and then divert the shoppers’ money onto cards for themselves.

A 20-year-old cashier at a Best Buy on Staten Island was arrested two weeks ago and accused of fraudulently ringing up gifts cards for $600. A Kmart employee, 22, was arrested the same week in Hazlet, N.J., and accused of stealing more than $1,500, partly by diverting false refunds and layaway plans onto gift cards.

Other schemes are slightly more complex: early this year, a 20-year-old worker at a Sears in Milford, Conn., was charged with manipulating the store’s computers to divert more than $35,000 onto gift cards that were fraudulently activated.

Retail experts say they can only estimate what portion of their theft losses can be traced to employees, to shoplifting and to vendors, but they view their own store workers as the leading culprits. The national study, based on information obtained from 106 retail chains that responded to a questionnaire, said employees were responsible for 43 percent of the stores’ unexplained losses, versus 36 percent for shoplifting.

The study, known as the 2008 National Retail Security Survey, showed that employee theft rose slightly that year to $15.5 billion.

“The retail industry has come to the realization that, as the Pogo comic strip said, ‘We have met the enemy, and he is us,’ ” said Richard C. Hollinger, the survey’s principal author and a professor of criminology at the University of Florida.

The most common type of employee theft is “sweethearting,” in which cashiers fail to ring up or scan goods that friends or relatives present at the register, Professor Hollinger said. Stealing from the till remains a problem, too. But with gift cards continuing to grow in popularity, they are an increasingly easy target.

Whatever method employees use to steal, their take is more substantial than that of the average shoplifter. Mr. Bamfield’s global study of retail theft found that larcenous employees averaged $1,890 in theft, compared with $438 for shoplifters.

“I’m sure there are employees who steal because they feel aggrieved over a wage freeze or the way they’re treated,” said Mr. Bamfield, director of the Center for Retail Research, based in Nottingham, England. But “it’s very easy to be tempted in a retail environment. You have merchandise, you have cash, you have friends who want cellphones and iPods.”

Retail professionals emphasized that only a small percentage of employees steal. Officials at Wal-Mart, Target, Macy’s and Best Buy declined to discuss employee theft, a subject many companies find embarrassing, saying that industry associations were better positioned to discuss it.

In some cases, employee theft is part of a bigger problem: organized crime. Casey Chroust, executive vice president for retail operations at the Retail Industry Leaders Association, said that organized criminals often pressure or pay retail employees to slip them gift cards or tell them when and where security guards are patrolling.

Detective David Hill, a retail theft specialist with the Montgomery County Police Department in Maryland, said two areas he aimed to focus on were organized retail crime and gift card fraud. He said he was investigating a 20-year-old cashier who wrote down shoppers’ credit card numbers and then used them to fill more than $13,000 in gift cards — at $200 a pop.

“For us, gift cards are harder to track than a stolen credit card,” Detective Hill said. “If you go to make a purchase with a gift card, you don’t have to show ID.”

Several years ago, retailers complained to eBay that people were auctioning a dozen or two $200 or $500 gift cards from Best Buy or Home Depot. It is one thing for a shopper to return a $300 power drill, refund it for a $300 gift card and auction that on eBay, retailers say, but it is far more suspicious when someone auctions 20 gift cards.

“The online marketplace provides an outlet for people with fraudulently obtained merchandise or gift cards,” said Joseph J. LaRocca, senior asset protection adviser with the National Retail Federation. “They used to sell these things on a street corner or a local pawnshop. But in today’s world, they put them online for a national or international distribution, and that brings a much bigger customer base and commands a higher price. We know goods sold on the street, they get 30 cents on the dollar. Goods sold on the Internet get 70 to 80 cents, with gift cards getting about 80 cents.”

Many retailers have loss-prevention specialists who monitor online auctions of gift cards to ferret out thieves. Bowing to retailers’ concerns, eBay now bars sellers from auctioning cards over $500 in value or more than one gift card a week. Paul Jones, eBay’s director of global asset protection, said his company was committed to working with retailers and law enforcement to combat gift card fraud.

Many retailers have embraced technology to fight employee theft. Data mining programs can now detect whether a particular cashier is refunding far more items than other cashiers, a strategy often used to fill fraudulent gift cards. When such trends are detected, store officials often review video, taken by overhead cameras, to see whether a cashier repeatedly did refunds with the same friend or relative.

One company, StopLift, based in Cambridge, Mass., has even developed software that, when used with overhead cameras, can detect when cashiers engage in sweethearting, by not running merchandise over the scanner or by letting acquaintances take merchandise without paying. The software then alerts managers.

Professor Hollinger says the rate of theft is greatest among retailers with high turnover rates and many part-time workers, who may be less loyal and under more financial pressure than full-time workers.

He also found higher theft among younger workers. “Older workers know they have a lot more to lose — promotional opportunities, health insurance, 401(k)’s and pensions,” Professor Hollinger said.

Does living in a blue state make people blue? It seems so, according to a new study in Science magazine that ranks states according to their happiness. The study finds that New Yorkers are the unhappiest people in America and their neighbors in Connecticut come in a close second, followed by Michigan, Indiana, New Jersey, California, and Illinois. And the happiest states? Drum roll, please…Louisiana, Hawaii, Florida, Tennessee, and Arizona.

Eight of the ten happiest states lean right while eight of the ten unhappiest tilt left. While the study by no means proves that being liberal makes people unhappy, it does reflect some of the unfortunate implications of living in a blue state.

But first a note on the study. Using data from the 2005-2008 Behavioral Risk Factor Surveillance System and a 2003 economics paper examining quality-of-life indicators, economists regressed the subjective measure of well-being (how people rate their satisfaction) against the objective measure (states’ quality-of-life rankings based on compensating differentials). A compensating differential in labor economics refers to the additional amount of income an employer must pay a worker to compensate for the undesirability of a job or the location’s lack of amenities (e.g. local and state tax levels, climate, environmental conditions, quality of schools, and crime rates).

For example, employers in New York would have to pay higher wages to compensate for New York’s high taxes, traffic congestion, cold weather, and poor schools. Due to these “disamenities,” New York ranked lowest on the quality-of-life index.

What’s noteworthy about the study is that states’ quality-of-life rankings (measured by their compensating differentials) correlated exceedingly well with residents’ satisfaction ratings. The correlation between quality of life and satisfaction is statistically significant (P=0.0001; r=0.6; r2=0.36). The coefficient of determination r2 shows how well the regression line fits the data points. While an r2 of 0.36 may not seem large—and in some studies may not be statistically significant—it is unusually high by the standards of behavioral science. To give an idea of the magnitude of this correlation, the r2 of people’s satisfaction ratings taken two weeks apart is also 0.36.

The study suggests that quality of life heavily influences happiness. This may seem obvious, but until this study, social scientists have struggled to develop a model that supports this hypothesis. Now we know that people who say they’re satisfied with their lives aren’t just delusional or overly optimistic, and people who say they’re unsatisfied aren’t just pessimists. People have legitimate reasons to be happy or unhappy.

And well, high taxes seem to be a big reason—ostensibly an even bigger reason than weather given that California is one of the unhappiest states and inclement Louisiana is the happiest. Further, considering how much New York’s crime rate has dropped and schools have improved in the last decade, taxes seem to overwhelm even these two critical factors in the happiness equation. According to the Tax Foundation 2008 analysis, three of the top five unhappiest states—New York, Connecticut and New Jersey—have the highest state-local tax burdens. On the other hand, four of the top five happiest states—Louisiana, Florida, Tennessee and Arizona—are among the states with the lowest state-local tax burdens. True, correlation doesn’t prove causation, and high taxes alone don’t always make people miserable, but there’s something going on here.

In states with high property, income, and sales taxes like New York, people have less money to spend on other things that make them happy. They have less money to spend on vacations, hobbies, home improvements, eating out and child care. Another problem may be that people receive a low return on their tax dollars. The study’s authors note that people are least happy in states that impose high taxes but don’t provide matching public benefits (e.g. good highways to relieve congestion and reduce commute times). It’s in states where taxes disproportionately subsidize public employee pensions and entitlement programs, but don’t much improve the general public’s quality of life, that people are most unhappy.

This intuitively makes sense. If you’re paying more than a third of your income in taxes, as many New Yorkers do, then you expect to realize the benefits from your hard-earned tax dollars. You expect quality schools, good roads, low crime rates, and quick commutes. You expect your local and state governments to be responsive to your needs, not to the cash flows of entrenched public employee unions and other special interests.

Many liberal state governments like those in Albany, Trenton and Sacramento are spending more and more on entitlement programs and public employee pensions, racking up more and more debt, and imposing more and more taxes to pay for it all—while ignoring their taxpayers’ needs. Taxpayers, however, aren’t just getting unhappy. They’re getting out. United Van Lines’ 2009 annual study shows that New York, New Jersey, Michigan and Illinois are among the states with the highest outbound migration while Alabama and Tennessee are among the states with the highest inbound migration.

This doesn’t bode well for high-spending, high-tax states like New York where outbound migrants’ income is 13% greater than that of inbound migrants. In 2006, this differential meant a loss of $4.3 billion in taxpayer income for the state. State governments therefore have a vested interest in keeping residents happy by reducing taxes and reigning in irresponsible spending.

Taxes may not be the root of all unhappiness, but they do result in some very sad citizens.

HONG KONG (MarketWatch) — As Japan marks the 20th anniversary of its stock-market peak this week, China appears to have learned key lessons from its neighbor’s subsequent economic downturn, according to an expert on the Japanese bubble.

Nomura Institute of Research’s Richard Koo says Beijing policymakers deserve high marks for their all-in effort to support the economy through a period of global balance-sheet deflation.

Specifically, Koo cites Beijing’s decision to unleash massive stimulus spending and a flood of new lending from state-controlled banks.

“They realized that if you put in proper fiscal stimulus from the very beginning and keep it up through the period of adjustment, then it is possible to keep the gross domestic product from collapsing, even with the bursting of a bubble,” Tokyo-based Koo said in an interview with MarketWatch.

China’s actions stand in contrast to the Japanese moves in the 1990s, when the government there failed to step up spending at a time when the private sector was de-leveraging, said Koo, author of the 2008 book “The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession.”

The actions of Beijing’s policymakers were among the boldest of all major economies in responding to the global financial crisis, unveiling late last year a 4 trillion yuan ($585 billion) stimulus plan — the equivalent to 13.5% of annual GDP — that would run over two years.

Lending was similarly expanded, with Bank of America Merrill Lynch estimating Chinese banks extended about 9.5 trillion yuan in new loans this year. Loan growth in 2010 should cool slightly to around 7.5 trillion yuan, according to Merrill estimates.

“They are the only ones who know what they are doing,” Koo said of the Chinese. “In the U.K. and U.S., everybody is arguing over fiscal stimulus [versus] monetary stimulus, but the Chinese are going straight to fiscal stimulus, supplemented by monetary stimulus.”

The measures contrast with Japan’s response to a collapse in real-estate, stocks and other economic sectors at the dawn of the 1990s.

Koo said that at first, Tokyo did too little, and when its credit markets froze up some years later, policy makers reacted with a misplaced emphasis upon monetary policy in the form of low interest rates in an effort to reboot lending.

The approach failed, he said, because Japanese firms had by then become more concerned about cutting debt, causing a “debt-rejection syndrome.”

“When borrowers are not borrowing money because they feel over-leveraged, there is nothing a central bank can do,” Koo said.

A 27% shadow of its former self

Koo’s remarks came as Japan was marking the 20th anniversary of its stock-market peak.